Default crisis looms for off-the-plan buyers

The head of a national real estate group fears that a serious default issue is on the horizon for the thousands of Australians buying off-the-plan properties.

Speaking to Mortgage Business’s sister publication Real Estate Business, Century 21 Australia chairman Charles Tarbey explained that off-the-plan properties may not come up to their contract value upon completion as valuers become more conservative in an environment of increasing risk.

“Valuers were the ones who were absolutely destroyed during the GFC, whereby people purchased property, the price of property fell through the floor and people sued the valuers because of the advice they had given on valuations,” Mr Tarbey said.

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“At this point in time I would think that valuers are going to start revisiting the pain they felt all those years ago and they are going to become more conservative in the way that they value properties.

“If that’s the case, and we look at properties coming in off-the-plan, they may not value up to what the contract prices were, which could indicate a serious default issue looming for a number of people.”

Mr Tarbey warned that unless off-the-plan buyers have extra cash they may not be able to meet the valuation requirements.

“If they are able to meet the valuation requirement, they may be more than 80 per cent which could indicate that they would be confronted with mortgage insurance, which would be another expense that they are not expecting,” he said. “Those are the areas that I’m watching very closely.”

Mr Tarbey highlighted that there have been a significant number of new developments over the last six to 12 months that sold within days of being released.

“There is a significant number of people out there that are watching these properties come out of the ground,” he said. “Some haven’t even started to come out of the ground yet, it could be two years away.”

The Century 21 chairman said noted that property prices can change drastically over a two-year period.

“A property in Penrith that was $300,000 two years ago is now selling for $700,000,” he said. “It could just as easily go the other way, particularly if interest rates climb.

“In 24 months’ time, if you’ve based everything on your salary today and the interest payments today, and the interest rates go from 4.5 per cent to 6.0 per cent, and the valuation comes down from 100 per cent of what you purchased it for to 90 per cent of what you purchased it for, there could be a very serious issue looming.”

Heightened risks in the off-the-plan property space have also been flagged by AMP Capital chief economist Shane Oliver, who told Mortgage Business’s sister publication SMSF Adviser that buyers could have difficulty obtaining finance once new developments have been built.

“There is the risk that investors who have bought property off-the-plan from developers may find that once the time comes to get the finance as the building is complete, that there could be problems, as they can’t then get the investment finance from banks,” Mr Oliver said. “So there could be a period of short-term indigestion and when some of the recent surge in unit construction or apartment construction comes into the market that could be a dampener on prices in some areas.”

In its latest Financial Stability Review, the Reserve Bank of Australia warned that settlement risk on apartments purchased off-the-plan may have increased as a direct result of the stricter criteria that banks are now applying to investor housing loans.

“Risks to residential property developers appear to have increased over the past six months,” the central bank said. “The large volume of apartment construction currently underway and planned has continued to grow, and the price of development sites has increased rapidly due to strong developer demand.”

The RBA noted that foreign developers have contributed to this dynamic, and are reportedly willing to pay more for development sites than many local developers.

“The risk of a downturn in apartment markets is greatest in the inner-city regions of Melbourne and Brisbane, which look susceptible to potential oversupply,” the RBA said.

“While investor demand appears strong at present, including from foreign investors, apartment markets in these areas already look soft, and future tenant demand, including from international students, is uncertain.”